What Qualifies for Residential Energy Efficient Tax Credit?
Add energy efficiency home products and improvements to your list of potential tax credits
Highlights
Qualifying energy-efficient products are eligible for a 26% tax credit in 2022
The tax credit drops to 22% in 2023 and ends in 2024
There are five different types of equipment that qualify for federal tax credits
Energy-efficient upgrades to the home are also eligible for tax credits
To apply, refer to the IRS for the correct form and instructions for filing
You’ve probably heard that investing in an environmentally friendly HVAC or electrical system can save you money in the long run. Still, upfront costs often scare homeowners away from making the switch. However, generating your own power with energy-efficient equipment doesn’t have to cost an arm and a leg. If you’ve had a new system installed in the past year or plan to do so next year, you may be eligible to reap the benefits of a hefty energy tax credit.
Types of Energy Efficiency Tax Credits
The IRS has expanded the list of qualifying energy efficiency home improvement credits in 2023. You may qualify for credits for making energy-efficient upgrades and installing clean energy equipment in your residence.
Energy Efficient Home Improvement Credit
The Energy Efficient Home Improvement Credit offers up to 30% credit for qualifying homeowner expenses with newer, more efficient exterior doors and windows, skylights, and insulation materials. It also includes upgrading to more efficient central air conditioning, water heaters, boilers, and furnaces. You may also qualify for up to a $150 home energy audit credit when you hire an energy professional to assess your home’s energy usage and loss.
Residential Clean Energy Credit
The Residential Clean Energy Credit offers potential credits for converting energy sources in your home. Examples include adding solar, wind, and geothermal power generation equipment, solar water heaters, fuel cells, and battery storage. You should note, however, that this does not include thermostat replacement.
State Incentives for Renewables and Efficiency
Federal energy tax credits might not be the only tax incentives you’re eligible to receive. The Database of State Incentives for Renewables and Efficiency (DSIRE) breaks down incentives at the state, local, utility, and federal levels. You can use the database to search for perks in your region and make financial decisions that give you the most rebates for your energy-efficient purchases.
Who Can Claim Energy Efficient Tax Credits
Homeowners will benefit the most from claiming energy-efficient tax credits if they improve their primary residences with qualifying improvements. Homeowners can also claim certain tax credits for improvements to their secondary residences or rental properties.
Renters aren’t left out of the opportunity, either. Whether you’re a homeowner or renter, it’s always a smart idea to talk to a trusted tax expert to find out which credits you may qualify for. Lastly, the Inflation Reduction Act of 2022 expanded potential tax credits to home builders and commercial building owners when they make higher-efficiency improvements.
What Appliances Qualify for Federal Energy Efficiency Tax Credits?
To qualify for a federal tax credit, you will need to choose products that meet the requirements set by ENERGY STAR. ENERGY STAR is a government-run program managed by the U.S. Environmental Protection Agency (EPA) and the U.S. Department of Energy (DOE). The program helps inform and encourage people to invest in energy-efficient products by offering tax credits as an incentive.
Homeowners who install the following types of ENERGY STAR-approved systems are often eligible for a 26% federal tax credit. Even so, refer to each type to see what your equipment may qualify you to receive:
1. Geothermal Heat Pumps
Geothermal heat pumps, also called ground-source heat pumps, use ground heat or bodies of water to heat and cool your home, making them one of the best energy-efficient HVAC systems available today. To qualify for a 26% tax credit, your system must be newly installed and ENERGY STAR certified.
2. Small Wind Turbines
Residential homes that have small wind turbines installed on the property are eligible for a 26% tax credit on the turbines and installation. To be considered a small wind turbine, your turbine must not produce more than 100 kW of electricity. Your home does not have to be your primary residency to qualify for this credit.
3. Solar Energy Systems
There are many types of solar energy systems, including solar panels, solar water heaters, solar roofing, and more. All of these solar equipment options are eligible for a 26% tax credit. To qualify, your system needs to generate 50% or more of its energy from the sun.
The system must also be certified by a government-endorsed source, like the Solar Rating and Certification Corporation (SRCC), one of the main leaders in certifying solar heating and cooling products in the U.S.
4. Residential Fuel Cells
Fuel cells produce electricity and power your home when you need backup generation. These cells are more efficient than combustion-based products because they only use hydrogen, water, and heat to operate. Investing in a fuel cell system makes you eligible for up to $500 per half kilowatt (kW) of power.
Your fuel cell needs to have at least 0.5 kW electricity capacity and an efficiency rating above 30% to qualify. You also need to have the fuel cell installed in your primary residence.
Multiple people residing in the home can receive individual credits for this type of credit for a maximum of $1,667 per 0.5kW; however, how much you receive depends on how much you claim on the costs paid for the fuel cell and installation.
*Note that married couples who file jointly on their tax returns are only eligible for one credit. If you’re unsure if you qualify, then you may wish to speak to an accountant to determine your eligibility for this type of tax credit.
5. Biomass Fuel Stoves
Biomass fuel stoves use, well, biomass fuel to heat your home or water system. Since biomass fuel consists of crops, trees, wood, plant matter, grass, and other natural materials, it is considered an energy-efficient heating system.
You’ll need to purchase a wood or a pellet stove with a 75% or more thermal efficiency rating to receive the credit, which gets deducted from the total cost of the product and installation. You’ll receive a 26% credit if you install your system in 2022 and a 22% credit if you install it in 2023.
Home Improvements That Qualify for Energy Tax Credits
In addition to energy-efficient products and services, a few types of energy efficiency improvements are eligible for receiving a tax credit. These include:
Insulation: You can receive 10% off insulation costs up to $500, not including the installation. Insulation credits include weatherstripping, spray foam sealants, caulking, and house wraps.
Metal and asphalt roofs: ENERGY STAR-certified roofs with a pigmented coating or cooling granules for heat reduction are eligible for 10% off your purchase up to $500. This does not include installation costs.
Windows, doors, and skylights: Receive 10% off your ENERGY STAR-certified windows, doors, and skylights for a maximum of $500 for doors and skylights and $200 for windows. These products must be a new installation, and the tax credit doesn’t count towards the installation costs.
How to Apply for a Residential Energy Tax Credit
Once you’ve made a purchase that qualifies you for a residential tax credit, you’ll need to refer to the Internal Revenue Service (IRS) to apply for the credit. The form for filing for the tax credit is Form 5695. Simply follow the instructions to apply for your tax credit.
If you have any questions regarding the filing process, speak with a financial professional or accountant near you to help you file for the tax credit.
Where to Find Energy Credits on Your Tax Return
You can find the energy credits under Form 5695, which is labeled as a “Nonbusiness Energy Property Credit.” Your tax credit will occur as a dollar-for-dollar reduction on how much income tax you owe during the tax year.
For instance, if your federal tax return says that you owe $500, but your energy efficiency tax credit totaled $250, then the IRS will reduce the amount you owe to $250.
Allie Ogletree contributed to this article.
Frequently Asked Questions
Sometimes, energy tax credits have an income requirement attached. For example, the Clean Vehicle Credit, which offers up to $7,500 in credits if you purchase a qualifying plug-in or electric vehicle, has an income cap of $300,000 for married couples filing jointly or $225,000 for heads of household and $150,000 for all other filers, so if your income is higher than these amounts you would be ineligible for the credit.
There are a wide range of energy tax credits available in 2023, and the IRS offers a credit up to 30% of the qualifying expense. The IRS lists examples of qualifying expenses such as energy-efficient skylights, windows, exterior doors, insulation, and central air conditioning. Other expenses such as natural gas, propane, oil water heaters, or furnaces may also qualify. Home energy audits are another potential credit. It’s always best to consult with a tax professional or your local HVAC contractor to understand what energy tax credits you may qualify for.